The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.

The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here are three Russell 2000 stocks that don’t make the cut and some better choices instead.

Scholastic (SCHL)

Market Cap: $742.6 million

Creator of the legendary Scholastic Book Fair, Scholastic (NASDAQ: SCHL) is an international company specializing in children's publishing, education, and media services.

Why Are We Out on SCHL?

1. Muted 1.9% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers
2. Poor free cash flow margin of 1.9% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Scholastic is trading at $29.41 per share, or 18.9x forward P/E. Check out our free in-depth research report to learn more about why SCHL doesn’t pass our bar.

Jackson Financial (JXN)

Market Cap: $6.66 billion

Spun off from British insurer Prudential plc in 2021 after more than 60 years as its U.S. subsidiary, Jackson Financial (NYSE: JXN) offers annuity products and retirement solutions that help Americans grow and protect their retirement savings and income.

Why Does JXN Fall Short?

1. Net premiums earned expanded by 2.5% annually over the last two years, falling below our expectations for the insurance sector
2. Expenses have increased as a percentage of revenue over the last four years as its pre-tax profit margin fell by 34.5 percentage points
3. Falling earnings per share over the last four years has some investors worried as stock prices ultimately follow EPS over the long term

At $98.01 per share, Jackson Financial trades at 0.6x forward P/B. If you’re considering JXN for your portfolio, see our FREE research report to learn more.

ServisFirst Bancshares (SFBS)

Market Cap: $3.89 billion

Founded in 2005 with a focus on serving underserved mid-sized businesses, ServisFirst Bancshares (NYSE: SFBS) is a bank holding company that provides commercial banking services to businesses and professionals through its subsidiary ServisFirst Bank.

Why Is SFBS Not Exciting?

1. Net interest income trends were unexciting over the last five years as its 9.7% annual growth was below the typical banking firm
2. Inferior net interest margin of 2.9% means it must compensate for lower profitability through increased loan originations
3. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 6.8% annually

ServisFirst Bancshares’s stock price of $71.13 implies a valuation ratio of 2.1x forward P/B. Read our free research report to see why you should think twice about including SFBS in your portfolio.

Stocks We Like More

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